Talk of Chinese Property Investors Bidding Up Australian Property Prices

Reddit

Paying the rent in Yuan

Our reserve bank governor got some rare praise from Dan on Tuesday:

“Well you have to give RBA governor Glenn Stevens credit (no pun intended).”

Why the sudden appreciation? (Pun intended.) Well, Glenn came up with a pearl of wisdom in his interview with Channel 7:

“It’s a mistake to assume a riskless, easy, and guaranteed way to prosperity is just to leverage to property.”

Whether the property spruikers take it to heart is another matter. Their “zero the hero” man, Ben Bernanke, continues his quest for global liquidity. But it’s other financiers of Australian property that are in the crosshairs of our readers.

Going by our Daily Reckoning inbox, suspicion of Chinese property investors bidding up Australian property prices is rampant. Responding to demand, as any free market enthusiast would, Dan discussed it in detail on Tuesday.

But what about the implications? Having our flagship resources industry rely on foreign credit and politically driven Chinese demand is unstable enough. Now our house prices rely on them as well!

But why is Glenn talking down property mania? A cynic, and a Daily Reckoning editor, would be inclined to scan for vested interests. You don’t have to scan far in this case. A few paragraphs down from Glenn’s earlier comment, one finds the following:

“I’ve got kids that within not too many years are going to want somewhere of their own to live and you wonder how is that going to be afforded.”

That’s right; it’s exactly the problem that featured in last week’s edition.

Who would want to spread their wings and fly the roost when you have nowhere to go? Why not stick with home and let the parents foot the bills? It’s a logical and financially responsible reaction to house prices. Your kids aren’t making it look like they’ve done an in depth CBA (cost benefit analysis), but who knows?

Metaphorically speaking

About the best metaphor for the direction the world is heading in comes from Daily Reckoning veteran Eric Fry:

“The US government – as well as several governments in Europe – is attempting to supplant aspects of the private sector.

“I don’t think that’s going to work. You cannot ever convert a parasite into a host. They are completely different organisms, which perform completely different functions. So right now we have credit contracting rapidly in the private sector, while it is expanding dramatically in the public sector.”

Discovery Channel fans might recall the zombie snails, who are controlled by the parasite that possesses them. Governments are remarkably similar to those parasites. They lead their host to doom as well. Likening fellow taxpayers to snails is probably not favourable, so we will leave it there.

It’s fair to say that the bond vigilantes are casting an eager eye over the scene, just waiting for the first course of escargot.

Bonding with Kevin

KRudd’s draft legislation for amending tax laws contains some spectacularly exciting provisions.

What, dear reader, do you think of having to pay a bond to the ATO?

We won’t bother with a poll. The Australian provides the details:

“Thousands of small businesses could be forced to put up a security deposit for the tax office under Rudd government draft laws meant to target foreign taxpayers and the shonky operators of Australian phoenix companies.”

The draft supposedly contains some provisions that have libertarian blood boiling:

“You commit an offence if the (Taxation) Commissioner requires you to give the security [bond] under section 255-100 and you fail to give the security as required.”

It even includes the words that give bureaucrats around the world wet dreams:

“… or any other means deemed reasonably appropriate by the tax office.”

Administrative justice anyone?

Obama forgets the kids

As the healthcare debate continues to rage on this side of the Pacific, Americans are proving to be a stellar example of how to get it wrong.

The New York Times explains one aspect of the plight of a national takeover of healthcare:

“Because of the new health care law, Arizona lawmakers must now find a way to maintain insurance coverage for 350,000 children and adults that they slashed just last week to help close a $2.6 billion budget deficit.

“Louisiana officials say a reduction in federal money to hospitals that treat the uninsured under the bill could be a death knell for their state-run charity hospital system.

“In California, policymakers estimate they will have to come up with an additional $500 million a year to make necessary increases in payments to Medicaid providers.

“The federal government has to account for states’ inability to sustain our current programs, much less expand,” said Kim Belshé, secretary of California’s Health and Human Services Agency.”

The stories go on.

But even the supposedly good aspects of the law are proving questionable.

One of the main benefits of Obamacare is that insurance companies cannot turn down people because of pre-existing conditions… unless those people are children. They aren’t provided for by the bill, according to Republicans.

Pelosi’s infamous quote is turning out to be true for Democrats.

“We have to pass the bill so you can find out what is in it.”

It seems the Democrats are relying on the Republicans to do the reading and editing of their law for them.

Apart from the administrative bungles being exposed, there are other issues. It stands to reason that many of those who did not have health insurance before Obamacare were in that position for a reason. There are several examples, but let’s take the favourite example of the poor.

If these people are now spending some of their money on health insurance, what will they spend less money on? Perhaps the food and hygiene items that keeps them healthy?

Home Sapiens

Is it possible that Australians have a unique gene, which causes them to suffer from house price obsession? There seems to be few more plausible arguments.

On Monday, Dan commented on the latest hype:

“President of the Real Estate Institute of Australia, David Airey told the same paper that the increases in sale prices and total properties listed reflected the “surging confidence” in the housing sector. He said that after the financial crisis, Australians were more interested in investing in property than on the stock market.”

Buying high, selling low has worked out well for investors all throughout history…

Meanwhile, at our sister publication, Money Morning, Kris Sayce points out that housing is an unproductive asset.

In other words, buying and selling houses doesn’t really get the economy anywhere. They serve a purpose, but don’t create anything. Building new ones sort of does further the economy, but only in the same way that buying a tulip does.

Both housing and tulips have been caught up in manias that ended in panics. But is it the panic, or the mania that is to blame?

19th century economist John Mills (not to be confused with John Stuart Mill) expressed his opinion clearly:

“Panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works.”

So, if he had it figured out, why have we still got it wrong? It’s because modern policy makers confuse indicators with goals. They want house prices to keep rising to make people feel prosperous.

But in a market, the reason prices rise is because people want more houses. It’s an indicator to developers that more houses are needed. A rise in prices indicates the market is out of equilibrium and profits are there to be made. Once more houses are built, prices will come down again.

But there exists an institution, infamously known as government, which stops the equilibrium from emerging. It creates laws to limit supply, so the price can’t fall. The weird thing is that people in Australia seem to want it that way.

But eventually, the distance between the market price and equilibrium will become too great. There is no reason why people should want to spend more of their income on housing than earlier generations.

The confusion of goal and indicator is also what leads to the free market being blamed for the crisis. If government policy is directed at improving indicators (thereby making them goals), they cease to indicate anything related to reality. This is known as Goodhart’s Law.

Meanwhile, it seems the indicators themselves are flawed.

An excellent illustration of the property media in action comes from the 5 Minute Forecast:

Bloomberg: Home Prices in 20 U.S. Cities Rose 0.3% in January
Home prices in 20 U.S. cities unexpectedly rose in January, indicating the housing market is stabilizing as the economy expands. The S&P/Case-Shiller home price index climbed 0.3% from the prior month…

MarketWatch: U.S. Jan. Case-Shiller Home Prices Fall 0.4%
Home prices in 20 major U.S. cities fell a not-seasonally adjusted 0.4% in January compared with December, according to the Case-Shiller home price index released Tuesday

It’s not just property mania that is full of statistical flim flam. Check out the latest “Climate Change Error“, although there has probably been another one since I wrote this.

Not Happy Jan!

Social unrest throughout Europe is turning into a serious concern. Put yourself in their shoes. Here is what they might be thinking:

“The bankers caused the crisis, they are getting bonuses higher than ever after being bailed out by our taxes, and now us workers are taking a hit in the form of wage deflation and government budget cuts.”

It really wouldn’t be difficult to stir up a frenzy, and there are plenty of people with an incentive to do so.

Is this the time for a resurgence of unions?

“Union workers across Europe are walking off their jobs as workers protest pay cuts. Britain has been hit especially hard, with newspapers labeling the bout of strikes the ‘spring of discontent’.”

Person of the year is clueless

“An economic puzzle Bernanke can’t solve” is the title of a Reuters article that caught our eye. Of course, the Austrian School of economics has the solution, and has had it for a very long time, but let’s get to that later. First, what is the problem?

“If the U.S. economy is growing rapidly, why isn’t it creating jobs?”

This could aptly be named the paradox of Keynes.

Obviously, there is a concern that the stats are rubbish, but let’s not go there.

Just in case Bernanke is reading this, here is the answer to his puzzle, provided by Peter Schiff in the Wall Street Journal:

“Governments cannot create, but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn’t have a surplus, then it must come from taxes. If taxes don’t go up, then it must come from increased borrowing. If lenders won’t lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation. Something cannot be effortlessly created from nothing.

“Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.”

Peter Schiff’s article was from 2008, while the Austrian School of Economics theories he uses are much older. It seems they have been vindicated, but still not recognised at the Federal Reserve.

Out of left field

Renowned professor James Lovelock has come up with some cracking climate change comments. For those of you thinking this is outside of our scope, think again:

“It may be necessary to put democracy on hold for a while.”

Umm. Why?

Humans are “not clever enough”.

Oh.

The last comment we’ll mention here is one that is particularly amusing, as it contradicts the first:

“You need sceptics, especially when the science gets very big and monolithic.”

Being sceptical in a dictatorial regime isn’t good for your health.

Nickolai Hubble
The Daily Reckoning Week in Review

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
Reddit

Comments

  1. Glenn Stevens TV jaunt was hilarious and the antics from him and his crew since then have ad me in stitches. The key focus Glenn had was one of a potential problem in hosing speculation, all i could imagine is he had been in a comber since 2005 and had his first brief on the board last month after waking from his slumber.

    A family friend of mine had a home in Essendon (a middle to upper class Melbourne suburb) they sold it for $810,000 last year in June thinking they had done so at the top of the market Unfortunately for them the market was just getting warmed up before the big race and they were left high and dry trying to get another property. After 9 months living at the in laws they paid $923,000 for a house is Ascotvale, sure it’s close to the city but it has a strong drug problem and is in an area that has several high-rise government housing blocks and the problems that go with them. The house is renovated but is smaller and has no backyard, a small front yard and they are down to one carpark.

    Although close to the city, Ascotvale is traditionally low to at best middle class demographic and yet they paid close to 18 times the median yearly income of $56,000. Keep in mind that in the 9 moths they spent every weekend competing with foreign investors, local investors and others in the same position as they were.

    You can see why for them and those who know them the thought of Glenn Stevens being slightly concerned is laughable and scary

    I hope and pray he is verbalizing that he is concerned but internally he is shitting himself or heaven help us all.

    Reply
  2. Just imagine the damage to our indiginous property market should the Chinese do what the Western World wants.
    Float the Yuan against the dollar.
    This (apparently) has been artificially restrained making exporting for China easy.
    So, see the Yuan appreciate by 10%, 20%, or more, as its true value is allowed to be reflected on exchanges, and see the impact that will have on the price Chinese property speculators can afford to pay in order to outbid local buyers.
    Now deal with that one Glen and Kevin. Perhaps, and this might be just a tad sanctimonious, you might regret dropping the FIBR regulations when you feared a US. UK property crash. Knee and Jerk in the same sentence. Thankyou.

    Reply
  3. A link below that demonstrates where China has placed Australia in the currency food chain and it isn’t about residential property or feeding our banks with funding that enables residential property prices.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a6zAb_1PqxFY

    The Chinese considered us only as a place to recycle USD paper by purchasing commodities and such equity instruments that own the resource; those with superior value retention prospects ONLY when compared to that of USD paper.

    The yuan trading is restricted to real partners outside the bankster hegemony like the “recalcitrant” Malaysians but note the report of the ASEAN trading opening.

    Reply
  4. Joe it might be the cynic in me but i am not sure Kevin would find any issue with massive Chinese investment in Australia. His love for Sweet and Sour Pork and Flied Rice is well documented, he has an obsession with the Chinese and i feel he would be as happy as a pig in s#$t with a second language of Mandarin in Australia.

    I have sen first hand what Chinese do when buying overseas property, my wife and i travel to Singapore twice a year to visit family. The Chinese have essentially removed any ability for the average person to own a home. The choices they have as citizens of their own country is to live in government housing (20km out of town near the airport) or take out a 99 year lease where they are under the control of a very strict body corporate.

    The market is so far out of reach for the average person and the Chinese have complete power. They have done some amazing things to Singapore and it is a great place to live and visit but the reality is the control is squarely in the hands of China. They are in positions of influence in government and the country really acts as a satellite experiment for the Motherland and it all started with property and development.

    This is an extreme case but it is the China model, they like the super rich and the super poor and nothing in between. if this is what Rudd is exploring then he needs to go. He doesn’t see this as being an issue, he believes that the 70% of Australian home owners will see benefit in higher prices and re-elect him to say thanks.

    What he fails to see is that 68% of those who own their homes are 55+, they will be experiencing first hand the stress his policies are having on their children and grand children. This generation are by in large appalled at how a government could actively reduce the quality of life of it’s citizens for the benefit of another countries prosperity

    I think he has unwittingly put the noose around his own neck and the generation of 20-45 will kick the chair from under him in the next election for not listening. The same goes to the perennially arrogant John Crumby who is now going back to a position of “i don;t have to explain myself”

    If we re-elect these people (and i say this knowing that the alternative is potentially worse) we are mad.

    Reply
  5. The housing section in both The Age and the Herald Sun both talked up Auction prices and both hinted that you need to go to an auction preparing yourself to spend 10-30% more t be in the game.

    It is disgusting and dishonest way to stir up an already overheated market

    It really makes you wonder who’s behind the scene’s???????????????????????????

    Reply
  6. Australia is blindly riding the Chinese Dragon to Bubblemania and will be economic wasteland before too long, albeit one owned by China

    Reply
  7. It’s hard to quantify but Chinese funds have definitely made its mark in Australian real estate due to the changes in regulations in both China and Australia with respect to foreign ownership and investing criteria. Read this >>

    http://bit.ly/bPFFv7

    Reply
  8. Overseas/National investors interested in large block full of potential in harbourside suburb in Sydney,Australia?
    ——-
    For Private Sale: 3 bedroom brick house with very large block (almost 1000sqm & facing 2 roads) in Seaforth, Manly area, Northern Beaches, Sydney, Australia

    • Unique opportunity to capitalise with this property due to location and block size;
    • Very large block in a quiet cul-de-sac street (also facing a 2nd road);
    • Located in a very nice harbourside suburb and well sought-after by families;
    • Great potential for sub-division (STCA);
    • 20 minutes drive to CBD;
    • Regular public transport (with express buses to CBD);
    • Close to transport, schools, shops, parks and harbour;
    • 3 bedrooms, 1 bathroom/separate toilet, dining-room, living-room, kitchen, laundry; verandah;
    • Covered outdoor entertaining area w/ BBQ;
    • Timber polished floorboards;
    • Off-street parking for 2 cars;
    • Large garden-shed;
    • Large gardens;
    • The highest performing suburb in NSW (for houses: 15% last 12 months);
    • Offers: AUD$1,280,000.
    For more information, please contact us – mksr145@gmail.com

    Mr & Mrs Sawyer
    February 1, 2011
    Reply
  9. “Float the Yuan against the dollar.”

    Float the yuan and the US will donate a trillion to the PD’s and buy, and buy, and buy until exports =0%, breaking business margins very quickly. Then, as exports struggle to find a market, dump all that fresh yuan back in to the market and send it crashing back down. Rinse, repeat. Pretty soon, China has no exporters left.

    I’m pretty sure that China choosing the peg is choosing the lesser of two evils.

    http://en.wikipedia.org/wiki/Black_Wednesday

    What I see in the market though is debt. Debt up the wazoo. In a bubble pop, that’s the money that will evaporate first, and probably force an overcorrection. The problem is that of the fractional reserve system itself. Without ever increasing debt, population, market expansion deflation will kick in, and if it cannot be stopped, the whole ‘inflation only’ banking system goes with it.

    You only think this is normal because it’s the world you have grown up in. You want to know what’s normal? The price of a loaf of bread being roughly the same when you are born as when you die(ignoring normal market forces, like more or less wheat farmers or harvesting improvements).

    In that world, your goal is that of saving your productivity, that of YOUR productive efforts, and buying what you need and passing some of that stored effort to your children. What not normal is sitting on a depreciating asset like a house, and watching it evaluate x50-300 times it’s original buying price in 30 years.

    This is how the world has always been. Notice how this stops and the middle class slides down in to the lower class? You think this was an accident? Whose children are being priced out of the market by this?

    Chris in IT
    February 1, 2011
    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au